India may seek $7.5 billion in extra spending to spur growth

October 14, 2016 — INDOLINK Consulting (es)

Source: Business Standard, Oct 14, 2016

New Delhi: India may seek parliamentary approval to spend about $7.5 billion more on roads, railways and other public programmes over the next five months, two government sources said, as Prime Minister Narendra Modi looks to spur growth and create jobs.

The new spending, details of which are still being worked out, would come at a time when private investment has plunged, leading to a slowdown.It would also coincide with the run-up to a crucial state election early next year in Uttar Pradesh.At $7.5 billion, the additional spending would represent about 2.5 per cent of the total budgeted so far for the current financial year.

The Uttar Pradesh poll is shaping up to be one of the most important tests for the Bharatiya Janata Party, with ramifications both for the smooth functioning of government and Prime Minister Modi’s chances of winning a second term in the 2019 national elections.

While some of his government’s development initiatives, such as electricity, bank accounts and cooking gas, have started reaching people in the country’s vast rural hinterland, the administration has struggled to create enough jobs to meet their aspirations.

Modi has promised to create 250 million jobs over the next decade, but Asia’s third-largest economy is not growing fast enough to absorb the roughly 1 million young people who enter the job market every month.Unemployment rose to five per cent in 2015/16, from 3.8 per cent in 2011/12, government data showed.

With private sector investment still failing to take off amid tepid demand and tight credit, Modi is left with little choice but to lean on public spending to fill the gap.

Analysts said additional spending on roads, railways and rural programmes, such as an employment guarantee scheme, could provide jobs to thousands of people.”Our biggest challenge is to create jobs,” a senior finance ministry official said.

The second source, a senior government official, said the extra spending was needed to fund existing programmes and not oriented toward boosting growth. But he added that without the additional investment, the economy would struggle.

Finance Minister Arun Jaitley is likely to seek the Parliament’s blessing for extra spending next month, the officials said.

The new spending would come after lawmakers approved 209 billion rupees in additional investments in August.Together, the total extra spending over the budgeted 19.78 trillion rupees expenditure could boost growth by about 0.4 percentage points, the finance ministry official said.

India’s economy expanded 7.1 per cent in the April-June quarter, compared with 7.9 per cent in the previous quarter.

Fiscal challenge

Jaitley has told officials in his ministry that they need to fund the additional spending without breaching his fiscal deficit target of 3.5 per cent of GDP, according to the finance ministry official.

Last year, Jaitley had to impose a small spending cut of 42 billion rupees, despite revenue receipts overshooting initial estimates by nearly five per cent, to meet the deficit target of 3.9 per cent of GDP.

The two officials said balancing the books could be tricky now as well. India’s fiscal deficit during the five months to August was 76.4 per cent of the budgeted target for the financial year ending in March 2017, government data showed.

Earlier this month, the government was dealt a setback when an auction of telecom airwaves fell short of internal expectations, leaving a hole of around 150 billion rupees, one of the officials said.

Another source of funds, a 565 billion rupees disinvestment target, is also yet to take off. Government data shows it has so far raised only 31.8 billion rupees.Further, a hike in the wages of nearly 10 million employees and pensioners has added to the stress on government finances.A recent report by the World Bank warned a shortfall in revenues from stake sales and the spectrum auction could hit public finances.

“If these are not met, there is a risk that growth-enhancing capital and social spending may be cut to meet fiscal targets, or that fiscal targets may be missed,” said the report.

But Jaitley’s budget team is betting on up to 120 billion rupees in savings in fuel subsidies, a pickup in tax receipts and a windfall gain of about 145 billion rupees from a tax amnesty.

The picture would be clearer by the end of November, as more information becomes available about the disinvestment process and tax collections, the finance ministry official said.